The Pension Myth and the Financial Realities

Everyone knows about the good old days, when hardworking Americans were able to enjoy a comfortable, worry-free retirement thanks to their healthy pension. But like many tales from decades ago, the reality wasn’t as sweet as recalled, and the situation facing many of today’s retirees isn’t necessarily much worse—though it may feel like it.

The numbers, on the surface, are stark: Just 13% of people working for Corporate America have a defined-benefit pension plan these days, down from 76% in the mid-1980s, according to data from the Bureau of Labor Statistics.

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But the reality is that very few people worked at one company long enough to get a pension that could support them in retirement. That’s true even at blue-chip companies like AT&T and IBM, which offered the kind of pensions on which legends are built. In fact, policy expert Dallas Salisbury, former head of retirement think tank Employee Benefits Research Institute, said he invited a pension actuary who had worked at AT&T to talk to EBRI about how exactly AT&T could afford such rich benefits. His answer: Only about 10% of employees worked there long enough to get a pension, and just a fraction of them got the full benefits. Based on BLS data from the 1970s and 1980s, professionals needed a 30-year tenure before they were eligible for a pension that amounted to 30% of their last year’s income. Despite the lore of the “company man,” the median tenure for all wage and salaried jobs in 1983 was five years, about where it was in 2016, based on the latest EBRI data.

“This myth that since ‘I worked for a company with a pension, I’d get a good pension’ was the common belief, so people didn’t worry when they should have, and didn’t save,” says Salisbury. “There isn’t a more acute crisis now. Far more Americans are saving for, and thinking about, retirement—and actually have real benefits.”

Granted, many companies switched from pension plans to 401(k) plans in an attempt to save money. That shifted the burden to employees, and left behind lower-income workers and contract employees unable to scrape up savings on their own. On the plus side, however, the number of people covered by some sort of plan today is triple the number in 1975.

Share of Workforce
With Pensions

Private sector

Public sector

100%

100%

50

50

0

0

2008

‘97

1988

1987

‘98

2008

‘18

‘18

Share of Workforce

With Pensions

Private sector

Public sector

100%

100%

50

50

0

0

‘98

2008

‘18

1988

‘97

2008

‘18

1987

Source: Bureau of Labor Statistics

Yet it’s hard to shake the notion that retirement used to be easier. Part of the reason is longevity: People are living longer—five years longer for men today than in the 1980s, and three years for women—but the average retirement age for college-educated men has inched up just a year from the mid-1970s, to nearly 66.

The bigger reason may lie in the mechanics of saving for retirement and then turning that into income—a constellation of investing decisions that had previously been handled by a pension but now falls to employees. That means people are more focused on retirement, and often more anxious. To get the most out of a 401(k), investors need to start early to benefit from compounding, a big ask for millennials struggling with student-loan debt. With a pension, retirees were guaranteed a percentage of their income, and didn’t have to worry about actively contributing or figuring out the right allocations.

The other challenge is turning savings into income to last for retirement. “What the 401(k) did was pin a hundred $1,000 bills on the jacket of an old person, and tell them to go on the bus and be careful—with a pamphlet of financial literacy with tips of do’s and don’ts in their pocket,” says Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at the New School, in New York. “It’s just insane that it’s never even imagined how the de-accumulation process would happen. The traditional plan took care of that.”

The financial-services industry is trying to come up with ways to create guaranteed income to ease this step. Many policy experts recommend a low-cost lifetime income annuity within a retirement plan. “Annuities are the new defined-benefit plans,” says Patrick Rowan, senior managing director of income products at TIAA. The company, which oversees $1 trillion in assets and manages pensions for educators, introduced a “test drive” feature that lets participants in its variable annuity opt for a two-year trial before deciding if they want to lock in lifetime income.

About 80% of participants in defined-contribution plans expressed interest in guaranteed lifetime-income products, according to a recent EBRI survey. But actual take-up is slow. “It’s something lots of people are talking about but nobody is doing,” says Brooks Herman, head of data and research at 401(k) plan tracker BrightScope. The other hurdle is that the advice to use simple income annuities typically comes with the caveat that retirees should work with a financial advisor to navigate the complexities of annuities and determine if it’s a good fit, given health conditions and other sources of income. Yet surveys show that only a third of Americans use a financial planner; Salisbury says he puts that number closer to single digits.

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Of course, one key source of guaranteed income is Social Security. Salisbury, who retired from EBRI in 2015, has gone against the usual advice to delay taking Social Security until 70, which means a bigger benefit. For most people, Salisbury says, that advice is still sound. But as a veteran policy wonk and Washington fixture, Salisbury is all too familiar with the needed fixes to the Social Security. “I didn’t wait until 70, since I am in the highest taxable wage group—and if anyone is going to see their benefits cut [in coming decades], I am.”

Salisbury says he has always been a “strong believer” in annuitizing income. One option is longevity insurance, which requires a smaller lump sum and doesn’t usually kick in with payments until someone turns 85; that’s why Salisbury says 70 is the “most efficient” time to buy such a policy. For those trying to come up with the right formula to tap their nest egg, Salisbury says the Internal Revenue Service’s required minimum distribution formula for when people turn 70½ is a good rule of thumb. “That’s about as fast as you should take it out,” he says, adding that it encourages people to live within their means, even if that means downsizing.

In other words, some things about retirement haven’t changed: People still need to save more and spend less. “Is it new and unusual for people to hit retirement with limited savings and having spent their money on their kids’ education? It has happened for decades,” Salisbury says. “The only difference now is that there is data on it.”

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